The European Commission proposed an amendment to current insolvency laws which seeks to modernize the EU’s existing laws which have proven to be inadequate in the face of the recent economic recession. (Europa.eu)

On December 12, 2012, the European Commission proposed an amendment (Proposal) to Council Regulation (EC) No. 1346/2000 on insolvency proceedings adopted in 2002. The Proposal, (EC) No. 2012/0360, seeks to modernize the EU’s existing insolvency laws, which have proven to be inadequate in the face of the recent economic recession.

The current insolvency laws are largely directed toward the liquidation of a company’s assets rather than helping the struggling company repay its debts. According to Viviane Reding, the Vice President of the European Commission, the EU’s “current insolvency rules need updating to make it easier for viable businesses in financial difficulties to keep afloat rather than liquidating.” Another problem with the current insolvency laws is their lack of a workable jurisdictional standard. The EU’s insolvency law states that jurisdiction is proper in “the court of the member state where the debtor’s [center] of main interests is located.” However, the center of main interests standard has failed to provide clarity for courts, leading to a patchwork of different interpretations between the Member States. Further, the current insolvency laws do not require coordination between primary liquidation proceedings in one EU Member State with any secondary liquidation proceedings in another Member State.

The Proposal strives to modernize the existing law in order to “increase the efficiency and effectiveness of cross-border insolvency proceedings, affecting an estimated 50,000 companies across the EU every year.” The main thrust of the Proposal is “a shift in emphasis to promote pre-insolvency and rescue procedures.” Rather than focus on liquidation, the Proposal seeks to encompass pre-insolvency and hybrid proceedings designed to provide an alternative to liquidation as the primary form of relief. To provide greater clarity to the issue of whether jurisdiction is proper, the Proposal provides more detail on how to meet the insolvency law’s jurisdictional requirements by providing a new recital to Article 12(a). The Proposal also seeks to enhance coordination between Member States by simplifying the procedures for concurrent proceedings in different jurisdictions and by requiring a “standard notice of proceedings and a standard claim form for insolvency proceedings to be used by all Member States.”

The Proposal has been greeted with enthusiasm. Heralded as “a step in the right direction,” the Proposal seeks to create a business friendly environment by providing legal certainty, assistance to creditors, and a first step toward the EU becoming a business culture of “rescue and recovery” rather than one where bankruptcy is stigmatized. Practitioners are also happy that the Proposal increases a single court’s ability to administer a proceeding in which assets are located in separate countries rather than requiring the commencement of separate proceedings in each country where the assets are located.

However, the Proposal is not without its share of criticism. Many practitioners, who were hoping for a bright line definition for the center of main interests standard, have expressed skepticism over whether the Proposal’s modified language will actually increase clarity to the uncertainty regarding jurisdiction. Some practitioners fear that modifying the language of the current insolvency laws will seem appropriate in theory but cumbersome and unworkable in practice. Further, an Internet privacy watchdog has stated that “there [is] insufficient data protection safeguards built into proposed reforms to the EU’s insolvency law framework.” With the Proposal mandating communication between different Member States, the watchdog fears that the Proposal does not go far enough in delineating what type of security will protect sensitive information.

If implemented, the Proposal would continue a growing European trend to move away from its previous insolvency model and toward a system more familiar to business in the US. Before the Proposal will be enacted, however, it must still be considered and passed by both the EU Parliament and the Council of the EU.

Greg Henning is a 2L at the University of Denver Sturm College of Law and a Staff Editor for the Denver Journal of International Law and Policy.

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